Investors of Northern Star Resources (ASX: NST) just got an early Christmas gift from Barrick Gold (ABX). According to a news release that was published on December 22, 2013, Northern Star Resources is acquiring the Plutonic mine from Barrick Gold for a cash consideration of A$25M, or US$22.3M.
Northern Star Resources is listed on the Australian Stock Exchange; shares of this company are not trading on American soil at this point in time (and should not be mistaken with Northern Star Mining (OTCPK:NSMSF)). Your humble scribe has been invested in this company for some time and is gleefully rubbing his hands upon digesting the news.
In actual fact, we have had an inkling that such a deal might be in the offing for some time, and have shared our suspicion with our readers here. Patting ourselves on the shoulder we quote from our September article:
"The Yilgarn South sale has allegedly attracted more interested parties than just Gold Fields and these parties might still be around for discussions regarding the Plutonic mine. Local miner Northern Star comes to mind. Applying similar metrics as were achieved for the Yilgarn South sale we would assume a value of around $75M give or take $25M for this mine."
We would have considered our price estimate from that article of $50M to $100M a veritable bargain. Noting the published purchase price of less than half of our lower range, we cannot help but diagnose a rush to the exit by Barrick Gold.
The Plutonic mine has been in operation since 1990 and has yielded 5.24M ounces in its mine life so far. The mine has consistently produced around 100,000 ounces per year and has a history of reliable resource to reserve conversion, maintaining a 5 years + rolling mine life. All-In Sustaining Costs of around $1,100/oz have been quoted by Barrick Gold.
We have quipped before that now is the time to purchase a gold mine in Australia, if that was someone's ambition. The presently discussed sale of the Plutonic mine follows an earlier sale of three other Australian assets, the Yilgarn South mines, by Barrick Gold to Gold Fields (GFI), and the sale of Alacer Gold's (OTCPK:ALIAF) Australian assets not long thereafter.
A quick valuation of the sale considers the price per equivalent reserve ounces where we count proven and probable reserves in full and resources only partially depending on their confidence class. Using this method we found that Gold Fields paid $115 per equivalent reserve ounce in the ground when it purchased the Yilgarn South assets in August. At the time we felt that this price had the hallmarks of a fire sale.
Considering the price of $76 per equivalent reserve ounce that went across the table for the Plutonic mine, we have to admit that we are lost for words, and that does not happen often.
After taking an impairment charge of $14M earlier in the year, Plutonic had a carrying value of $35M on Barrick's books. The final purchase price only amounts to 64% of the book value.
Typically, the share price has dropped for the purchasing company upon announcement of acquisitions recently. In this particular case Northern Star's share price is up 5% in early trading in Australia as we finish off this text.
Barrick Gold appears eager to monetize what it considers non-core assets, even at rock bottom prices. In this particular case, we believe that the purchaser of this mine has struck an opportunistic deal that has the potential to transform the company.
Barrick Gold has one asset less to worry about and a few millions of cash more to pay down its suffocating debt load. The fact that no higher price could be achieved is telling for the state of the gold sector. The fact that Barrick sold Plutonic anyway gives indication of the state of affairs at Barrick Gold.
Additional disclosure: I am long ASX:NST .